SEC Adopts Amendments to Rule 15c2-12

In mid-August, the SEC adopted amendments to its Rule 15c2-12 (the “Rule”), following 18 months of review of comments made to its original proposed amendments. The SEC action will be published in the Federal Register shortly. The compliance date of the new amended Rule (“2018 Amendments”) is 180 days after publication. Since 1995 governmental issuers and other obligors (like nonprofit health care institutions using tax-exempt debt) (collectively, “Issuers”) have, as a condition of being able to use an underwriter to market their bonds, had to sign “continuing disclosure agreements” (“CDAs”) promising to supply annual financial reports and to provide prompt notice upon the occurrence of certain events which would materially affect the bond issue subject to the CDA.

New “Material Events.” The 2018 Amendments add two new “events” for which Issuers would be contractually obligated through new CDAs signed after the compliance date to report on EMMA within 10 days of occurrence (the numbering used here reflects the addition of these events to a list contained in the text of the Rule):

(15) Incurrence of a “financial obligation” of the [Issuer], if material, or agreement to covenants, events of default, remedies, priority rights or other similar terms of a financial obligation, any of which affect security holders, if material.

This item would apply to financial obligations entered into, or covenants etc. made, only after the issuance date of a new bond issue to which a new CDA is signed.

(16) Default, event of acceleration, termination event, modification of terms or other similar events under a financial obligation of an Issuer, if any such event reflects financial difficulties.

This item would require reporting any such event which occurs after a new CDA is signed, but with respect to all financial obligations of the Issuer, whether entered into before or after the relevant CDA.

The two new material events adopted in the 2018 Amendments are identical to the language proposed in 2017.

Critical to the 2018 Amendments is a new definition of “financial obligation,” which is needed in order to implement the new events (15) and (16):

Financial Obligation means a (i) debt obligation; (ii) derivative instrument entered into in connection with, or pledged as security or a source of payment for, an existing or planned debt obligation; or (iii) guarantee of (i) or (ii).

As defined, a financial obligation excludes any municipal security for which an official statement is posted to EMMA pursuant to the Rule.

Reduced Scope of “Financial Obligation.” It was understood when these amendments were proposed in 2017 that the SEC was responding to concerns that the growth of private placement and direct bank loan transactions, which are not subject to any reporting obligations of the Rule, had created an information gap. However, the original proposal contained a very broad definition of “financial obligation” which went far beyond private placements of debt, and included leases, derivative instruments, guarantees and monetary obligations under judicial, administrative or arbitration proceedings. This resulted in widespread opposition from many corners of the municipal market, and the SEC has in the 2018 Amendments pulled back the scope of the definition to just cover debt and certain debt-related obligations. The SEC made clear in its Release announcing the 2018 Amendments that it intends to cover any obligation that acts like a debt, meaning a borrowing of money intended to be repaid over time, regardless of its duration (short or long) or its name. For purposes of complying with the 2018 Amendments, debt is not defined by state law. Furthermore, although the term “lease” was taken out of the definition, the SEC expects that lease-purchase or certificate of participation transactions in the form of a lease (what used to be called a “capital lease”) are covered.

Materiality. A large number of comments on the proposed amendments criticized the use of the term “material” and “reflecting financial difficulties” as standards for when a material event report must be made. The SEC rejected all of these comments and declined to provide any further guidance on how to test for materiality, so issuers and obligors will continue to have to review their own facts and circumstances to decide when a report has to be made. Given the lack of clarity on this term from the MCDC process a few years ago, this will create significant difficulties for implementation by issuers and underwriters, who have an obligation in a new bond transaction to verify if the issuer has complied with its prior CDA undertakings.

Next Steps. Although there will be six months before new bond issues must include the 2018 Amendments in a CDA, issuers would be well advised to start analyzing how the new reporting requirements will impact them, to update disclosure practices and policies and establish internal monitoring mechanisms to detect covered events. Issuers will want to consult in advance with their disclosure or bond counsel to think about how to measure materiality for this new Rule. The urgency of this task will vary widely. Infrequent Issuers may not face these considerations for years. Underwriters will need to update their diligence procedures prior to the compliance date.

There are many open questions about how to interpret and implement the 2018 Amendments. For instance, can an Issuer specify in advance in its CDA what threshold it plans to use (absent other factors) for determining if a new debt obligation is material to existing bondholders (e.g. some percentage of its general fund revenues)? New information may come from the SEC itself (as occurred when the Rule was originally adopted), or from conferences among lawyers or municipal organizations. Orrick lawyers will continue to keep our clients informed about any such developments and will work with our clients to assist in interpreting and preparing for implementation of the new rules.

If you have further questions at this time, please feel free to reach out to a member of Orrick’s Public Finance Department.

Practice:

Robert Feyer is a senior counsel in the San Francisco office of the firm's Public Finance Department. After 40 years representing issuers and underwriters, Mr. Feyer retired from active practice working on bond transactions at the end of 2017, but continues to provide assistance and mentoring within the Department.

From 1986 to his retirement, Bob was the lead bond and disclosure counsel for the State of California, working with a team of lawyers to complete the issuance of an estimated 470 billion dollars of new and refunding general obligation bonds, cash flow notes and warrants and lease revenue obligations, including several of the largest long-term municipal bond issues in U.S. history. He was recognized by TheAmerican Lawyer magazine in April 2003 as one of 10 "Dealmakers of the Year" for his work on a $12.5 billion cash flow note borrowing in October 2002. This work also garnered recognition as a "Lawyer of the Year in Transactional Law" in 2003 from California Lawyer magazine. Bob has spoken often at conferences and webinars on municipal finance and disclosure matters, and is a member of the Securities Law Committee of the National Association of Bond Lawyers.

Bob also had an active practice in private activity financing for such purposes as solid waste disposal, pollution control and industrial development. For more than 40 years, he has been a lead bond counsel for the California Pollution Control Financing Authority.

Aside from his municipal bond practice, Bob has worked actively with low-income individuals who seek to obtain legal guardianships for young children. In May, 2014 Bob received the James P. Preovolos Award for Outstanding Pro Bono Services in Family Law from the Justice and Diversity Center of the Bar Association of San Francisco.

From 1972 to 1975, while on a leave of absence from Orrick, Bob was a Captain in the United States Air Force where he served on the staff of the Air Force General Counsel, and he later served as a legislative assistant to a United States Senator in Washington, D.C.

Practice:

Christine Reynolds is a partner in the Public Finance Department. She has broad experience as bond counsel, disclosure counsel, underwriter’s counsel and borrower’s counsel across a wide range of public finance sectors.

Christine’s expertise includes various general obligation and revenue bond financings, including those relating to transportation, education, healthcare, water and wastewater, urban renewal, public power and other infrastructure financings.

She has extensive knowledge and experience with disclosure requirements for municipal issuers under federal securities laws, including both initial and continuing disclosure issues, material events disclosure, public offerings, private placements and other matters.

Christine is a frequent speaker at conferences and seminars given by trade and professional organizations within the municipal finance industry.

Practice:

James practices in the public law area and also has experience in corporate and securities and real estate law.

His focus in the public law area primarily has been serving as bond counsel, disclosure counsel and underwriters’ counsel on a variety of public finance transactions for cities, counties and special authorities throughout Texas.

James has extensive experience in the area of transportation development and financing, including representation advising the Harris County Toll Road Authority on project development and financing matters, as well as operations, contracting and legislative matters. James has also worked in various capacities on transactions for several other transportation issuers, including the Brazoria County Toll Road Authority, the North East Texas Regional Mobility Authority, Houston METRO, the Houston Airport System, City of Dallas/Love Field, the San Antonio Airport System, the Hidalgo County Regional Mobility Authority and the North Texas Tollway Authority. He has also been involved in a number of public/private development projects, including the development and financing of sports and convention facilities, among others.

Practice:

Alison J. Radecki is a partner in Orrick’s Public Finance Department. Since joining the firm in 1999, Alison has served as bond counsel, underwriter’s counsel, disclosure counsel, borrower’s counsel, bank counsel and credit enhancer’s counsel.

Alison has been involved in financings for healthcare institutions, education institutions (including charter schools), cultural institutions and other nonprofit entities, municipalities and public power agencies. She regularly serves as bond counsel to the Dormitory Authority of the State of New York and The Trust for Cultural Resources of The City of New York.

Alison has extensive experience with variable rate debt, tax-exempt and taxable debt, letters of credit and liquidity supported bonds, conversions, restructurings, reofferings, setting up direct purchase programs for banks, as well as assisting in the creation of various interest rate products for her underwriting clients. Most recently, she has focused on post-issuance compliance matters, in particular assisting industry participants with the SEC’s Municipalities Continuing Disclosure Cooperation Initiative, as well as with their ongoing continuing disclosure compliance obligations.

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